• Maintain BUY, with new DCF-derived TP of SGD1.02 from SGD1.04, 14% upside and c.6% FY25F yield. We remain positive on Riverstone’s 2H24F outlook premised on the recovery of global semiconductor sales (July semiconductor sales spiked 19% YoY) as well as improving market dynamics within the healthcare gloves industry. The company may benefit from the potential trade diversion with the latest revision of higher import tariff by the US on China glove makers.

• Industry dynamics remain positive. Current industry operating dynamics remain in favour of the local gloves manufacturers as customers are more receptive to the ASP increase. That said, industry blended ASP is set to improve further to USD21-22/1,000 pieces (pcs) by 4QCY24 as Malaysian glove makers are in the discussion stage to raise prices to translate the effect of the weakening USD to customers. China glove makers’ ASPs now range at USD18-19/1,000 pcs from USD17-18 in the previous quarter. In terms of demand, Malaysia’s gloves export volume surged 66% MoM and 105% YoY in August, outpacing the growth in July (+12% MoM; +43% YoY). The latest export volume is even 34% higher compare to the pre-pandemic’s 2-year monthly average number, indicating that the recovery momentum of global gloves demand remains healthy. Meanwhile, prospects in the global semiconductor industry are expected to be driven by the increasing demand for generative artificial intelligence (AI), high-performance computing (HPC), and rapid advancement of the AI industry.

• US tariff on China. To recap, The Office of the United States Trade Representative (USTR) announced the final modifications concerning the statutory review of tariff actions on China, entailing a new set tariff rate on medical/surgical gloves, which will be revised to 50% and 100% (effective 2025 and 2026) from 25% effective 2026 as proposed in May. We expect RSTON to benefit from the potential trade diversion given >55% of its revenue is contributed by the healthcare gloves segment.

• Earnings revision and valuation. We lower our FY24F-26F earnings by 3%, 8% and 8%, largely reflecting the impact of the weakening USD against the MYR. Our USD/MYR assumptions for FY24-26 are lowered to 4.50, 4.00 and 4.10. For every 5% change in USD/MYR, the impact to RSTON’s FY25F-26F net earnings is at 8% and 8%. Nevertheless, we believe the impact could be mitigated by the company raising ASP to offset against the weakening USD (currently it is in discussion with customers to raise prices by at least USD1) which in turn should sustain our base case long-term margin outlook. RSTON’s valuation remains compelling, trading at +0.2SD from its pre- COVID-19 historical mean. Post earnings adjustment, we derived our new TP of SGD1.02, representing +0.7SD from its pre-COVID-19 historical mean. Our TP incorporates a 0% ESG premium as RSTON’s ESG score of 3.1 is on par with the country median.

Source: RHB Research - 7 Oct 2024